1. Mrs. Abecrombus has $2,000 to invest. There are only two possible investments: a levered firm with a D/E ratio of 1 and a share price of $20, and a risk-free asset with a return of 10%. If Mrs. Abecrombus prefers a D/E ratio of 2, how can she use homemade leverage to achieve her goal?

Select one:

a. borrow $2,000 at the risk-free rate and buy 200 shares

b. lend $2,000 at the risk-free rate and sell 100 shares

c. lend $1,000 at the risk-free rate and sell 50 shares

d. borrow $1,500 at the risk-free rate and buy 175 shares

e. borrow $1,000 at the risk-free rate and buy 150 shares

2. Async Inc. and Sync Corp. both have the same EBIT of $3 million and tax rate of 30%. Async is all-equity financed with a cost of capital of 12%, whereas Sync has debt of $7.5 million. What is Sync's firm value using the M&M Proposition?

Select one:

a. $15,250,000

b. $17,500,000

c. $19,750,000

d. $25,000,000

e. $27,250,000

3. Aceline Corporation is currently all-equity financed, with a cost of capital of 15% and firm value of $10 million. The company is considering a $2 million debt issue at 8% interest rate. The money raised will be used to repurchase shares. The company’s marginal tax rate is 32%. According to the M&M Proposition, what is Aceline’s WACC after the debt issue?

Select one:

a. 13.09%

b. 14.10%

c. 14.20%

d. 15.00%

e. 16.19%